EUR/USD: Favouring the downside

The Day So Far

Definitely a calmer tone across markets this morning, with early downside in equities at the European open swiftly negated in cautious trading following yesterday’s substantial selloff. The S&P traded almost 20 points higher from the lows seen in last night’s US close, while the Dax re-claimed the 11,000 handle. Sentiment was aided by a strong Asian session, as the Shanghai Composite rebounded from several sessions of heavy losses, closing 4.8% higher. On the data front, the German labour market continued to demonstrate its resilience in the face of considerable economic uncertainty, unemployment falling for the 9th straight month. Sentiment was further helped by Greek media reports from Greece that Greek Prime Minister Tsipras was re-considering Juncker’s previously-rebuffed proposal, although this was rapidly contradicted by a senior Greek government official who claimed that a u-turn wasn’t on the cards after all. So, confusion reigns on the day which will almost certainly see Greece default on its payments to the IMF. However, this would apparently not count as an ‘official’ default even though it is in all but name, and that, coupled with hope against hope that a deal will be struck is perhaps preventing a further follow-through this morning in the downside action seen in equities this week. Rather ominously for the optimists, the creditors have apparently set a deadline of midnight tonight to agree to the proposals outlined over the weekend. Greek officials have suggested they may make their own counter-proposal today, but it looks increasingly likely that another day will pass without a deal. The Greek government appear to have grossly misjudged the creditors’ resolve over the course of the talks, and this latest gambit, a planned referendum intended to put pressure back on the creditors once more, has fallen on deaf ears.

The Afternoon View

Barring any positive news on Greece, we remain in the bearish camp ahead of the US session, looking for shorts in equities. The euro is the toughest to call, the strong rebound over the past quarter (Greece headlines notwithstanding) putting it on track for its best quarter versus the dollar since 2011. However, we do continue to favour the downside, not just on the obvious Grexit threat, but on the steady yet subtle improvement in US economic data in recent weeks, with yesterday’s Pending Home Sales at the highest level in 9 years. Speaking of which, the economic calendar for this afternoon is fairly sparse aside from the Chicago PMI for June.